3/10/2016
11 March 2016
1
•
Michael D Easton
•
Licensed Customs Broker (by CBP)
•
12 years in International Trade
•
Recent speaking engagements at the Cleveland Freight Association, Case
Western Reserve Law School, Institute of Supply Management, and various companies throughout Northeast Ohio
•
Star USA, Inc.
•
Consulting, Process Improvement, In- & Out-sourced services
•
Import and Export Compliance
•
International Trade Management
•
Export Control & Supply Chain Security
•
Education, Training and Awareness
•
Helping companies large & small since 1996
•
LCB and FMC Licensed
2
1

Presenter
Michael D. Easton
Vice President & General Manager
Star USA, Inc.
mdeaston@starusa.org
419-281-4100 ext. 112
•
•
•
Export Agencies
•
Examples of Non-compliance
•
Implementing Compliance
•
3
•
Exporting is a privilege not a right
• “Regulatory” = Code of Federal Regulations = Legal Requirement
•
Severe penalties for non-compliance
•
Adherence to the regulations requires understanding
•
Dept. of Commerce held over 350 industry events in 2015 to raise awareness and expand knowledge & understanding
4
3/10/2016
2

•
General Purpose: Create Jobs and Promote Trade
•
Participation is strictly voluntary
•
Though voluntary, there are regulatory obligations for all participants, and penalties for non-compliance
•
Multi-lateral agreements may give other countries enforcement rights over U.S. participants
•
Duty is an additional surcharge imposed on imports
•
Agreements may reduce or eliminate duties and some fees, but will not address taxes such as Sales Tax (USA), GST (Canada), or
VAT (Mexico and most of the rest of the world)
5
3/10/2016
6
3

Department of Commerce
Census Bureau
Bureau of Industry & Security (BIS)
Department of the Treasury
Office of Foreign Assets Control (OFAC)
Department of State
Directorate of Defense Trade Controls (DDTC)
Department of Homeland Security
Customs and Border Protection (CBP)
•
Electronic Export Information (EEI)
• Export Administration Regulations (EAR)
•
Consolidated Screening List
•
Anti-boycott
•
Specially Designated Nationals (SDN)
•
Anti-boycott
• Economic Sanctions
•
International Traffic In Arms (ITAR)
•
United States Munitions List (USML)
•
Customs-Trade Partnership Against
Terrorism (C-TPAT)
7
Department of Commerce https://www.census.gov
•
Electronic Export Information (EEI)
• 15 CFR 30 Subpart A
•
USPPI, Date of Export, Ultimate Consignee, US State of Origin, Country of Ultimate
Destination, Method of Transportation, Conveyance Name, Carrier Identification, Port of
Export, Related Party Indicator, Domestic or Foreign Indicator, Commodity
Classification Number, Commodity Description, Value, ECCN, Export License, and more
•
Automated Export System (AES)
•
Now part of the Automated Commercial Environment (ACE)
•
Export metrics; helps shape foreign policy
•
Exceptions: Low Value Shipments (< $2,500 per Schedule B), Canada
• Schedule B
•
Used for Export Only; 9,000 classifications (HTSUS = 18,000); Based on the WCO HTS which is used in 98% of global trade
8
3/10/2016
4

Department of Commerce https://www.bis.doc.gov
• Export Administration Regulations
•
Commerce Control List (CCL)
•
Dual Use Items: commodities for commercial purposes with potential military application
•
Computers, Civilian Aircraft, Welders, Test Equipment, Bearings
•
Export Control Classification Number (ECCN)
•
Category, Type, and Designation
• Ex. Ball & Solid Roller bearings (2A001); Centrifuge (2B229); Optical
Equipment (6B004)
•
Controlled Items for Export
•
Consolidated Screening List
•
11 Lists
•
Representing Depts of Commerce (3), State (2), and Treasury (6)
•
Anti-boycott
•
Designed to prohibit or penalize cooperation with international economic boycotts in which the US does not participate
9
Department of the Treasury https://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Foreign-Assets-Control.aspx
•
Economic Sanctions
•
End-user (Individuals and Companies)
•
Country
•
Limiting the transfer of technology; prohibits payment; export licenses
•
Specially Designated and Blocked Persons List
•
Individuals & Companies
•
Anti-boycott
•
Focusing primarily on money transfer; separately maintained & regulated
10
3/10/2016
5

Department of State https://www.pmddtc.state.gov/
•
International Traffic in Arms
Regulations (ITAR)
•
US Munitions List (USML)
•
Technical data related to defense, particularly blueprints & designs
•
Export Control Reform
•
2009 initiative to unify interagency regulations on exports to make it easier for companies to comply with the regulations
11
Department of Homeland Security https://www.cbp.gov/CTPAT
•
Border Enforcement
•
1993 Customs Modernization Act: CBP enforces all regulations at the borders
•
Customs-Trade Partnership Against Terrorism (C-TPAT)
•
CBP Response to 9/11
•
More than 10,000 Members
•
Focus on securing the international supply chain through cooperative efforts between enforcement and industry
12
3/10/2016
6

3/10/2016
Some real world examples of non-compliance
13
• The Violation:
Federal Express (FedEx) was charged with six violations.
On two occasions in 2006, FedEx, located in Memphis, Tennessee, caused, aided and abetted acts prohibited by the EAR when it facilitated the attempted unlicensed export of a PC dialogic board, designated
EAR99, and electronic equipment, classified as ECCN 5A991, from the United States to Mayrow in Dubai, United Arab Emirates. Also, in
December 2005, FedEx violated the EAR when it facilitated the unlicensed export of flight simulation software classified as ECCN
4A994 to Beijing University of Aeronautics and Astronautics (BUAA a/k/a Beihang University), an organization on the BIS Entity List located in China. Lastly, FedEx facilitated the unlicensed export of
EAR99 printer components from the United States to end-users in
Syria.
• The Penalty:
On December 2011, FedEx agreed to pay a $370,000 civil penalty
7

In response to this case, Assistant Secretary for Export Enforcement
David W. Mills said;
“
It is vital that every stakeholder in the U.S. exporting chain remain vigilant in its efforts to prevent prohibited transactions that may be detrimental to our national security, and each will be held accountable if it fails to do so.
”
3/10/2016
• The Violation:
Between November 2003 and January 2007,
Ingersoll Machine Tools (IMT) of Rockford, Illinois made seven unlicensed deemed exports of production and development technology for vertical fiber placement machines and production technology for five axis milling machines classified as ECCN 1E001 and 2E002 to Indian and Italian nationals. The technology was controlled for national security and missile technology reasons to Italy and
India. The technology was also controlled to India for nuclear nonproliferation reasons.
• The Penalty:
On August 11, 2008, IMT agreed to pay a
$126,000 civil penalty
8

• The Violation:
On February 6, 2015, Universal Industries Limited, Inc.
(Universal) of Boynton Beach, FL, and its vice president Russell Marshall pled guilty to charges related to the violation of a Department of
Commerce Denial Order. Marshall and Universal sold controlled aircraft parts to other U.S. companies with the knowledge that these companies would export the parts. On July 12, 2012, a three-year denial of export privileges had been imposed on Universal and Marshall following their 2011 guilty pleas to violating the Arms Export Control Act, and False Statements, respectively.
• The Penalty:
On April 24, 2015, Marshall was sentenced in U.S. District
Court for the Southern District of Florida to 41 months in prison, two years of probation, and a $200 special assessment. On the same date,
Universal was sentenced to one year of probation and an $800 special assessment.
3/10/2016
• The Violation:
Hough worked for a government contractor based at
Fort Hood, Texas. On the side, she operated an online business selling surplus military clothing and equipment on eBay . Hough purchased military equipment for online re-sale and sold two
ACOGs (Advanced Combat Optical Gunsights) to an individual in
Connecticut with the knowledge and understanding the items were destined for Germany , in violation of ITAR.
• The Penalty:
On June 19, 2014, Hough pleaded guilty to one count of smuggling and was sentenced to 6 months in prison followed by
3 years of supervised release, including 8 months home confinement . She was ordered to perform 100 hours of community service and forfeit $198,054 .
9

•
FedEx is a large, well known distribution company that handles a significant amount of international cargo and has staff devoted to maintaining export compliance
•
Ingersoll Machine Tools is a medium sized manufacturing company of around 250 employees. They make machine tools and aerospace equipment for various industries
•
Universal Industries made the sale, but Russell Mitchell was also found personally responsible for the events and he was sentenced to prison because of his actions
•
Janiece Michelle Hough was a lone individual making domestic sales on eBay and was not directly involved in any export, but she was found responsible and sentenced to prison
19
3/10/2016
What does compliance mean in practice?
20
10

•
What is covered?
•
Any item in U.S. Trade – Goods, Technology, and Information
•
U.S. items, wherever located
•
Deemed exports
•
Defense services and ITAR technical data
•
What is not covered?
•
Items in the public domain
•
Artistic or non-technical publications (maps, children‘s books, sheet music, calendars, film)
21
A deemed export is the “release” of controlled technology, software or information to a non-U.S. citizen. The release of this information is ‘deemed’ an export to that individual’s home country.
Under the provisions of §734.2 (a)(3), a release can occur from something as simple as the following:
•
Providing a tour of a facility that uses controlled technology
•
Allowing someone to inspect a diagram of controlled technology
•
Instructing someone on how to use controlled technology
•
Giving a presentation about controlled technology
Includes: Carrying technical data on sales trips, providing technical assistance or guidance, sending e-mails, talking on the phone, etc.
22
3/10/2016
11

1.
Denied Party Screening
•
Use the Consolidated Screening List provided by the BIS
2.
Accurately Determine Schedule B
•
Know your item: Commercial Application, Bill of Materials, Country of Origin
•
Get help: Engineers, Licensed Customs Brokers, Schedule B Search Engine, Prior Examples &
Precedent
3.
Accurately Determine ECCN
•
Get help: Manufacturer, Engineers, Internet Research, Consult an export professional, Commodity
Jurisdiction Request (CJ), CCL, USML, BIS Tools
4.
License Determination
•
Licenses can depend on the product, the buyer, or the destination, or any combination thereof
5.
Recordkeeping
•
Maintain all records for at least 5 years, including methodology used to arrive at your conclusions above.
•
Lack of records = presumption of non-compliance!
6.
Verify Accuracy
•
An often overlooked step; there must be safeguards in place to ensure compliance
7.
Prepare all of the information and file the EEI
23
3/10/2016
24
12

•
U.S. signed the Customs Modernization Act (“The Mod Act”) and the North American Free Trade Agreement on December 8,
1993, with both taking effect on January 1, 1994
•
NAFTA was the largest trade agreement of its kind at the time, and has acted as a model for many of the other trade agreements
•
Following the requirements of any FTA can be challenging for companies large and small, and many do not know how to start or what processes need to be in place
25
•
General Purpose: Create Jobs and Promote Trade
•
Methodology: Reduce and/or eliminate duties on imports
•
Duty is an additional surcharge imposed on imports
•
Agreements may reduce or eliminate duties (and some fees), but will not address taxes, i.e. Sales Tax, GST, or VA
•
Participation is strictly voluntary
•
Though voluntary, there are regulatory obligations for active participants, and penalties for non-compliance
•
Multi-lateral agreements may give other countries enforcement rights over
U.S. participants
•
Because the agreements are multi-lateral, there are benefits for both buying and selling
26
3/10/2016
13

1.
North American FTA (NAFTA)
2.
Australia-US FTA (AUSFTA)
3.
Korea-US FTA (KORUS)
4.
Dominican Republic & Central
American-US FTA (DR-CAFTA)
5.
Colombia-US FTA
6.
Israel-US FTA
7.
Jordan-US FTA
8.
Chile-US FTA
9.
Singapore-US FTA
10.
Bahrain-US FTA
11.
Morocco-US FTA
12.
Oman-US FTA
13.
Peru-US TPA
14.
Panama-US TPA
27
1.
Generalized System of Preferences (GSP)
2.
Caribbean Basin Economic Recovery Act (CBERA)
3.
African Growth and Recovery Act (AGOA)
4.
Agreement on Trade in Pharmaceutical Products
5.
Uruguay Round Concessions on Intermediate Chemicals for Dyes
6.
Automotive Products Trade Act
7.
Agreement on Trade in Civil Aircraft
28
3/10/2016
14

•
Who needs to be involved?
•
SALES
•
The duty preference provided by a FTA may mean the difference between making a sale and not making a sale, and will always make a difference to sales margins.
•
PURCHASING
• You will need to know the Origin, HTS, Cost, and FTA eligibility of your materials to perform qualification
•
LEGAL – REGULATORY – PRODUCT STEWARDSHIP – LOGISTICS
•
Not all companies have a team devoted to FTA Qualification, but they generally reside in one or more of these areas.
•
Qualification requires knowledge of the HTS, the FTA, as well as the company’s product lines and production processes
•
One size does not fit all
29
•
What do you need to know?
•
You must know where to go for information
•
Internal resources: Sales, Purchasing, Regulatory Teams
•
External resources: export.gov, usitc.gov, industry experts
• You should know if the product is dutiable
•
FTAs are aimed at duty preference and many products are already zero-rated (not dutiable), even without claiming the FTA!
•
Making a claim means you must be compliant even if you do not receive the benefit
•
What the rules are
•
Most FTA claims are only valid for a maximum of 1 year, and the process must be repeated annually
•
Rules vary based on the FTA and the HTS, found in the General Notes of the HTSUS
•
How to apply the rules
•
How to manage the process
30
3/10/2016
15

•
Generally 2 types of rules
•
Tariff Shift: Have I transformed this good enough to meet the requirements
•
Regional Value Content: Have I used enough “originating” materials in making my good that it can be considered originating on its own
•
How do I know which rules I can use?
•
Refer to the specific “Rule of Origin” for your product HTS
•
Ex. General Note 12(t) contains the rules of origin for NAFTA
•
Rules of Origin are generally:
•
Tariff Shift
• Regional Value Content
• Tariff Shift AND Regional Value Content
• Tariff Shift OR Regional Value Content
31
•
How do I manage the FTA process?
1.
Manage document requests from customers
•
What FTA are they requesting, which products, when do they need them by?
2.
Manage the products and qualification status
•
Generally based on either direct requests or known sales to certain countries
3.
Manage information from your suppliers
• HTS, CoO, FTA Eligibility for all components is critical to qualifying your own items
32
3/10/2016
16

3/10/2016
NAFTA is by far the most prevalent Free Trade Agreement for U.S. businesses today, and it serves as a model for other FTAs.
It is also one of the more complex FTAs
33
•
Article 502 (Import)
1.
Declaration of origination must be based on a valid Certificate of Origin
2.
Certificate must be in your possession at time of declaration
3.
Any Member Country may request, and must be provided, a copy of the
Certificate
4.
Corrections must be made “promptly”, and duties paid, when you have reason to believe that a Certificate contains incorrect information
5.
Member Country may deny benefits if importer fails to comply with any requirement
6.
Penalties can be waived if corrections are made voluntarily, but errors are subject to penalty actions until corrections are made
7.
Importers have 1 year from date of import to claim NAFTA
34
17

•
Article 504 (Export)
1.
Exporters shall provide a copy of the Certificate to its Customs administration upon Request
2.
Exporters shall “promptly” notify in writing all persons to whom a
Certificate was given if any incorrect information could affect the accuracy or validity of a provided Certificate
3.
False Certification by an exporter or producer to another party shall have the same legal consequences as would apply to an importer
4.
Any Member Country may apply warranted measures to an exporter or producer for failure to comply with any requirement
5.
Penalties are waived if corrections are made voluntarily, but errors are subject to penalty action until corrections are made
35
•
Article 505 (Records)
•
Exporters must maintain Certificates for 5 years from the date of signature, and all records relating to the origin determination, including:
• Purchase, cost, value, and payment for exported goods
• Purchase, cost, value, and payment for all materials (direct or indirect) used in production of a good
• Production process for the good in the form which it is exported
•
Importers must maintain Certificates for 5 years from the date of importation, including a copy of the Certificate
•
Retention periods can be changed by each Member Country
36
3/10/2016
18

•
Penalties
•
Penalties are maintained by each member country
•
19 U.S.C. 1592(c)
• Fraud = Domestic value of the merchandise
• Gross Negligence = Domestic value or 4 x Duties, taxes, & fees
• Negligence = Domestic value or 2 x Duties, taxes, & fees
• Prior Disclosure eliminates penalties for gross negligence or negligence
•
Violation of FTAs can also result in the denial of benefits for either or both the importer and exporter, permanently
37
3/10/2016
38
19

•
Chapter Shift
•
8707: “Bodies (including cabs), for motor vehicles of headings 8701 to 8705”
•
GN12(t): “A change to subheading 8707 from any other chapter, or…”
•
Heading Shift
•
8509: “Electromechanical domestic appliances, with self-contained electric motor, other than vacuum cleaners of heading 8508; parts thereof”
•
GN12(t): “A change to subheading 8509.90 from any other heading, or…”
•
Subheading Shift
•
Statistical Shift, rarely
39
•
Transaction Value Method
RVC =
TV-VNM
TV x 100
•
Net Cost Method
RVC =
NC-VNM
NC x 100
40
3/10/2016
20

•
Transaction Value Method
•
The actual price paid or payable for the imported item
•
Includes all components, labor & overhead, and profit
• Generally the preferred method for high-margin items
•
More forgiving, per Annex 402(6)
•
Only valid where an actual transaction has occurred
•
Net Cost Method
•
Excludes: sales promotions, marketing and after-sale service costs, royalties, shipping and packing costs, and non-allowable interest that may be included in the cost
• Includes: components, labor & overhead
•
Must be used when no transaction has occurred
•
Generally a lower threshold and preferable for low-margin items
41
Qualification can be determined if and only if
1.
We have a valid HTS Classification
2.
We have satisfied all applicable Rules of Origin
3.
We can substantiate the validity of the claim
42
3/10/2016
21

aka the Reasonable Care regulatory requirement
•
What constitutes substantiation?
•
Verifiable evidence to support a claim
•
What “verifiable evidence” do I need?
•
For Tariff Shift, you must have reliable evidence that the materials in question have “met the shift”
Generally in the form of written & verifiable evidence from suppliers
•
For RVC, you must have reliable evidence that the materials qualify as originating under the rules of the FTA – meaning a statement, voluntarily provided, from your supplier as well as accurate value records
•
Any item that you cannot verify is considered non-originating.
•
More requirements apply based on the FTA, such as Records for NAFTA in Article 505
43
HTSUS 8438.80.0000
Machinery, not specified or included elsewhere in this chapter, for the industrial preparation or manufacture of food or drink, other than machinery for the extraction or preparation of animal or fixed vegetable fats or oils; parts thereof; Other machinery.
Blender
Step 1: Determine the HTS
•
What is it?
•
What is it made from?
• How is it used?
•
Does it have other uses?
44
3/10/2016
22

Blender
HTS 8438.80
General Note 12(t) of the HTSUS:
Tariff Shift: Heading
Step 2: Determine the Rule of Origin
RVC Calculation
45
Blender
HTS 8438.80
Tariff Shift at the Heading Level
Q: Does my Bill of Material contain anything classified under heading 8438?
A: YES – Not all of my materials “meet the shift” requirement
Q: For those materials that do not meet the shift, can I substantiate that they all qualify for NAFTA?
A: NO – Not all of my suppliers have given me sufficient evidence that these parts qualify
Step 3: Apply the Rule
Result: I do not meet the Tariff Shift requirements for NAFTA
However, I can still attempt to qualify under RVC (“… or ”)
46
3/10/2016
23

Blender
Step 3: Apply the Rule
HTS 8438.80
RVC without Tariff Shift; 50% Net Cost Method
Q: Does my BoM contain at least 50% originating material?
A: YES
Net Cost: $380
Non-Originating Material: $88
Originating Material: $292
RVC = 77%
RVC =
NC-VNM
NC x 100
Result: I have met the RVC Requirement for
Net Cost of 50%
My product is eligible for NAFTA
47
3/10/2016
•
Why didn’t we use Transaction Value in the example?
•
I would need the actual sale price of the item, in addition to the costing information; it’s generally much easier to determine your item cost than it is to determine both the item cost and the sale price for each shipment. Variance in sales price can affect the result.
•
Why do you need the tariff codes from the suppliers?
•
We may need to classify component materials ourselves, but we need to understand the product well enough to do so. It’s generally far simpler to ask them for a classification than it is to go through the process of classifying unfamiliar parts. It also alleviates the risk of error, and if the HTS does not meet the shift, we will need FTA verification from them.
•
Certificate of Origin vs. Statement of Origin?
•
An FTA Certificate has a higher work standard to produce. Determining HTS and CoO is always going to be quicker at less risky than substantiating an FTA claim.
48
24

3/10/2016
?
49
Presenter
Michael D. Easton
Vice President & General Manager
Star USA, Inc.
Please feel free to get in touch with me or my company if you have any questions on import or export compliance!
Education and Awareness are critical components to our services.
419-281-4100 ext. 112 (or ‘0’ for the operator) mdeaston@starusa.org or compliance@starusa.org
50
25